Back in 2014, ARK Invest launched four actively managed ETFs (Exchange Traded Funds):
- ARK Innovation ETF (ARKK)
- Autonomous Technology and Robotics ETF (ARKQ)
- ARK Next Generation Internet ETF (ARKW)
- Genomic Revolution ETF (ARKG)
They were joined last year by a fifth ETF focused on fintech, ARK Fintech Innovation (ARKF).
The premise behind these ETFs was to identify companies that are overlooked by traditional sector-based strategies. Innovation, per se, is not a sector. But Catherine D. Wood, founder and CIO at ARK Invest, wanted to build portfolios that are focused on disruptive innovation.
Cathie Wood has been one of the most vocal Tesla (TSLA) bulls in the recent past. In April 2019, as TSLA shares were still trading below $200, she was giving TV interviews explaining why the stock could run to $4,000 and possibly higher. As the stock recently crossed $2,000 only 16 months later, this price target seems a lot less out of reach. Yet, the market had been persistently wrong with TSLA going nowhere for more than five years.
The logic behind this is simple. Disruptive innovation is by definition hard to predict with accuracy. The market can struggle to estimate the total addressable market of a new technology or for how long a company can sustain its growth and market share gains.
In this context, ARK's funds have been specifically focused on companies that are pushing boundaries in their respective fields and have a ton of optionality. This selection process has an important impact on time horizon, with holding periods of several years required to see a bullish thesis materialize. Are they all winners? Certainly not. But the companies that deliver on their premise are driving a portfolio performance above and beyond what any investor could dream of.
Given the extended holding period of its positions, ARK Invest funds can be a treasure trove of ideas and an amazing source to research the disruptors of our time. To be fair, several of my favorite and best performing investments in the past five years are still missing from ARK's portfolios. But that's besides the point. ARK's focus on long-term opportunities is offering a unique view into the disruptors of our time that you might have missed.
Let's review three important things I've learned reviewing these ETFs.
Image source: App Economy Insights
1) The reason behind ARK's performance
Looking at the performance at the end of July 2020, ARK's ETFs have outperformed the market by a significant margin, delivering from 19% to 35% annualized returns since 2014 (and a staggering 50% for the most recent one launched in 2019).
For context, the S&P 500 (SPY) delivered slightly more than 11% annualized over the same period.
If we focus on the drivers behind this performance, the length of the holding periods is an immensely important factor. You see, several of the top holdings of ARK's funds have gone nowhere for years before delivering mind-blowing returns in a matter of months. The goal here is not to time the market but to capitalize on the technology adoption curves of innovation, also known as the S-curve.
ARK has identified four key phases in the rise of disruptive innovation:
- Long flat adoption curves. During this phase, a lack of understanding is the main cause behind the delay in the acceptance of innovation. ARK explains that "during this phase, short-term price movements often reflect volatility more than a stock's underlying value."
- Decline before mass market acceptance. ARK is attributing this to the market's tendency to overestimate the impact of short-term events, and to underestimate the long-term trend of disruption. The goal for ARK is to find companies that have what it takes to "cross the chasm."
Source - An ever expanding market. Truly innovative companies can reach a mass market and grow their market share beyond any Wall Street projections. ARK looks in particular for companies that cut across multiple sectors because it gives them optionality with no clear ceiling on the upside.
- Continued evolution and differentiation. As companies mature, they can be, in turn, disrupted if they don't re-invest in their future. This is a key phase to identify new disruptors.
By looking for companies with maximum upside potential, ARK is building portfolios that look odd to many investors. Both Wall Street and Main Street are narrowly focused on the performance of their portfolios in the next few days, weeks or months. It gives little room for stocks that don't appear to potentially outperform in the near future or have yet to show significant traction in their product adoption or stock price.
Let's review the top holdings across these funds.
2) The biggest holdings across all ETFs
ARK is particularly known for its innovation ETF, ARKK, that represents the majority of net assets. As of August 23rd, 2020, ARK's net assets were broken down as follows:
Ticker Name Net Assets % ARKK ARK Innovation ETF $ 7,592,534,109 59% ARKW ARK Next Generation Internet ETF $ 2,171,652,856 17% ARKG Genomic Revolution ETF $ 2,015,302,158 16% ARKQ Autonomous Technology and Robotics ETF $ 523,633,171 4% ARKF ARK Fintech Innovation $ 499,260,198 4% Grand Total $ 12,802,382,491 100%
Source (chart by author)
To get a sense of the top holdings that represent ARK's approach, I pulled the data across all five ETFs combined to identify the top 10 holdings. The following list has emerged (data as of August 23rd, 2020):
Ticker Name Market value ($) % TSLA Tesla $ 1,044,960,905 8% NVTA Invitae $ 801,606,498 6% SQ Square $ 729,935,187 6% CRSP CRISPR Therapeutics $ 588,134,374 5% ROKU Roku $ 467,820,433 4% TWOU 2U $ 362,917,963 3% ILMN Illumina $ 355,791,817 3% Z Zillow Group $ 325,359,507 3% CGEN Compugen $ 314,278,756 2% EDIT Editas Medicine $ 298,302,440 2% Total Top 10 $ 5,289,107,882 41% Grand Total $ 12,802,382,491 100%
ARK's 5 ETFs combined TOP 10 - 8/23/2020 - Source
An important recurring theme in this top 10 is the genomic revolution. Many companies in this list are focused on genomics, whether they are developing, producing or enabling innovation in this field via CRISPR, targeted therapeutics, bioinformatics, molecular diagnosis and more. These include Invitae, CRISPR Therapeutics, Illumina, Compugen and Editas Medicine.
The other companies on this list have been clear disruptors in their respective fields, with no ceiling to their future potential. These include:
- Tesla, changing the way we generate and store energy.
- Square, changing the way we pay, borrow and invest.
- Roku, changing the way we consume TV content.
- 2U, changing the way students access their online courses.
- Zillow, changing the way we search, rent, buy or sell a house.
There are many ideas worth exploring when you go beyond the top 10 that I won't cover here in an effort to keep this article succinct.
I have been particularly impressed with the overall quality of the picks of the Next Generation Internet ETF (ARKW) over time. I have found several of my favorite picks popping in ARK's holdings over time. There is an obvious overlap between this ETF and the theme of the App Economy Portfolio that I have run over the same period. The portfolio is well-positioned to embrace a world disrupted by a global pandemic and embracing a digital transformation. I'm very grateful that the App Economy Portfolio has been performing in line with the very best of ARK's ETFs over the past five years, generating 33% returns annually as of this writing.
There are still many of my absolute favorite picks and best performing investments that are missing from ARK's portfolios. But if history is any indication, they usually find their way there, eventually.
3) The stocks that appear the most
The typical number of holdings in ARK's ETFs is anywhere between 39 and 49 stocks at the moment. As a result, I thought it would be insightful to see which stocks are repeated across several funds. While they may not all be top holdings, stocks that have taken multiple slots are undoubtedly emblematic of ARK's research, indicating a strong vote of confidence.
Therefore, I wanted to go beyond providing a view of the top holdings and cover a list of the stocks that appear the most across the five funds. I ranked the stocks by number of times they appear and focused on those that pop up in at least three of the five ETFs.
The following list emerges:
Source: App Economy Insights
Ticker Name Market Value ($) % Occurrence TSLA Tesla $ 1,044,960,905 8.2% 3 SQ Square $ 729,935,187 5.7% 3 TWOU 2U $ 362,917,963 2.8% 3 Z Zillow Group $ 325,359,507 2.5% 3 TREE Lending Tree $ 286,051,136 2.2% 3 WORK Slack Technologies $ 283,422,171 2.2% 3 TDOC Teladoc Health $ 280,432,722 2.2% 3 PSTG Pure Storage $ 258,845,679 2.0% 3 XLNX Xilinx $ 242,271,216 1.9% 4 VCYT Veracyte $ 222,408,380 1.7% 3 SPLK Splunk $ 190,069,581 1.5% 4 PINS Pinterest $ 188,690,541 1.5% 3 FB Facebook $ 151,285,730 1.2% 3 TWLO Twilio Inc. $ 137,219,619 1.1% 3 SE Sea Ltd. $ 122,444,251 1.0% 3 TSM Taiwan Semiconductor $ 119,600,268 0.9% 4 ICE Intercontinental Exch. $ 79,617,553 0.6% 3 AMZN Amazon.com $ 78,219,037 0.6% 3 OTCPK:TCEHY Tencent Holdings $ 70,558,475 0.6% 3 AAPL Apple $ 57,576,843 0.4% 3 DOCU DocuSign $ 54,882,622 0.4% 3 NVDA NVIDIA $ 34,768,518 0.3% 3 ONVO Organovo $ 10,862,118 0.1% 3 Subtotal $ 5,332,400,022 41.7% Grand Total $ 12,802,382,491
ARK Invest 5 ETFs - Highest occurrence - 8/23/2020 - Source
While several of the top holdings appear again, there are other noteworthy companies on this list.
- Several mega cap tech companies with a history of disruption: Apple, Amazon, Facebook, Tencent.
- Semiconductor companies such as Nvidia and Taiwan Semiconductor.
- Slack Technologies, changing the way we collaborate.
- Teladoc Health, changing doctor visit and virtual care.
- Several cloud companies like Twilio, DocuSign, Splunk, and Pure Storage.
- More genomics/bioinformatics with Veracyte and Organovo.
- Intercontinental Exchange, offering fully digital mortgages.
- Pinterest, shaping its social platform into an e-commerce powerhouse.
- Sea Limited, currently reshaping e-commerce in South-East Asia.
I could go on and dig deeper into the lists. But I believe this selection gives a very good sense of what ARK is going after. And I'm sure that, just like me, you'll find in these lists some of your best performers, and it will probably get you curious to get acquainted with the ones you might not be familiar with.
Bottom Line
Cathie Wood has proven naysayers wrong time and time again. ARK's performance is not simply a result of a fantastic bottom up picking approach, with companies representing the disruptive innovation of our generation. It's also a truly remarkable top down strategy focused on the secular growth stories of our time.
ARK's unusually long time horizon and willingness to hold onto its highest convictions for years has enabled these funds to outperform the competition on Wall Street.
Given that ARK's ideas are focused on a multi-year time horizon, its top holdings should be on any investor's radar as a fantastic pool of stock ideas. Whether you invest directly in these ETFs or use the top holdings as a source of inspiration for your own portfolio, I don't think you can go wrong here.
- Do you own any of ARK's funds?
- Have you used ARK as a source of information?
- Are some of these disruptors in your portfolio?
Let me know in the comments!
If you are looking for a portfolio of actionable ideas like this one, please consider joining the App Economy Portoflio. Start your free trial today!
The rise of the App Economy is disrupting many industries: retail, entertainment, financials, media, social platforms, healthcare, enterprise software and more.
